Intellectual Property Issues in Merger
and Acquisition Transactions
Editors: Mr. Ludwig Ng & Mr. Raymond Cheung
CONTENT
� Various forms of IP assets
� Warranties in MOU/Agreement
� Common traps in due diligence
� IP assets valuation
� Accounting treatment
PRETTY BABY Case
� Big Shark Co. wants to acquire Day Dream Co.
(PRC co.)
� Killer product – “Pretty Baby” applies certain
technology for interacting with player
PRETTY BABY case
� Existing products:
� “Pretty Baby” toy
� Video for kids featuring “Pretty Baby”& the Gang
� Fancy stationery set “Pretty Baby”& the Gang
� Big Shark wants to market “Pretty Baby”
products to the whole world
What IP assets are involved?
Customer / supplier databaseConfidential information
/ trade secrets
Fancy stationery designDesign
Scripts of “ ”
video
Copyright
Interactive technologyPatent
Trade Mark
What is Trade Mark?
� “Sign” capable of distinguishing the origin of
goods or services
� “Sign” can be:
words, letters, numerals, colours, sounds, the shape of
goods and any other combination of such sign
� Not descriptive – “ ”?
Consider ,
What is Trade Mark?
� Register in specific class(es) of
goods or services
� Goods: Classes 1-34
e.g. Class 11 : Electrical apparatus
Class 28 : Toys
� Services: Classes 35-43
e.g. Class 36 : Insurance and finance
Class 43 : Food service
What is Trade Mark?
� Exclusive right to use Trade Mark in business
� Rights obtained by registration
� Trade Mark registration is territorial
� Renewable every 10 years
Due Diligence Issues
� “ ” registered in relevant class?
� Class 28
� “ ” registered in relevant countries?
� All potential markets e.g. US, Europe (Community
TM)
� Country of manufacture (e.g. PRC, Hong Kong)
Due Diligence Issues
� Can “ ” be registered in countries of
potential markets?
� Any bad-faith registration
� Similar mark registered? e.g. Crazy Babe
� Trade mark search for similar marks
� Registration still active?
� Continuing use? Subject to revocation if non-use > 3 years
� Who is the current registered owner?
� Assignment of trade marks
What is Patent?
� Product
� • Process (method)
� Example of process patent:
� Manufacturing method
� Programming method for user
to train “ ”
� Full disclosure in exchange for
exclusive rights in
manufacturing and selling
product or in using process
Patent Rights – Market Monopoly
1. Patent Product
Exclusive right to make, put on the market,
use or import the product
2. Patent Process
Exclusive right to use the process or to make,
put on the market, use or import products
directly obtained from the process.
Benefits
� Gaining monopoly, prevent competition
– Only Big Shark can sell “ ”
� • Earning license fee /franchise fee
– Licensing technology to be used on “ ”,
“ ” etc.
� • Penetrating foreign markets
– Purchaser e.g. requires patent
registration as prerequisite for shelving goods
What is novelty?
� New
� Not available to public before application
(undisclosed)
� Written in oral form
� Publication anywhere in the world
Types of Patent
1. Standard patent (HK)
Invention patent 發明專利 (PRC)
2. Short-term patent
Utility model 實用新型 (PRC)
Standard Patent
� Maximum 20 years of protection
� Substantive examination
� Long application time: 3 - 4 years
Short-term Patent
� Available in some countries only
e.g. PRC, Japan, Australia,
Germany, but not US
� Max. 8 yrs of protection (HK) 10
yrs (PRC)
� No substantive examination
� Short application time: 6 months
� Owner to prove patent valid in
Court
Which type of patent is more applicable to
“ ”
1. Product life-cycle
2. How inventive is the product
3. Schedule for launching product
4. Budget
3 Golden Rules
1. Do NOT disclose invention until
application is filled (Novelty)
2. Patent is territorial
3. File application in other
countries within 1 YEAR from
the first application date
Paris Convention
� Claiming priority of the first
application date within the first
year
� In countries which are members
of Paris Convention
Example
Big Shark’s US application date2005/11/1
Big Shark filed application in US,
claiming China priority
2006/2/1
X filed application in US2005/12/1
Day Dream filed application in China2005/11/1
X’s application is NOT novel
compared to Big Shark’s !!!
Due diligence issues
� Has patent been expired?
� What kind of patent? Standard (20 years) or
short-term (8 or 10 years)?
� How many remaining years?
� Confirm content of patent
� Relevant to technology to be acquired?
� Sufficient disclosure?
� Who is the applicant? Day Dream Co. or
some inventor?
� May require inventor to undertake to assign
patent to Big Shark
Due diligence issues
� Is the patent applied/registered in
countries of potential markets and
countries of manufacture?
� Is priority claimed?
� Is it within 1-year priority period?
� If close to the 1-year priority
deadline
� Immediately file application in other
relevant countries
� Apply for PCT extension to 2.5 years
Due diligence issues
� Patent application in process –any
rejection/pending office action?
� Day Dream disclosed “ ”in any
tradeshow before patent application?
� Patentability search
� Assess novelty and non-obviousness
� Chance of successful registration
� Assignment/License affecting patent rights
� Confidentiality and non-compete clause in
key employees’ contracts
What is Copyright?
� The right to protect “an expression of
idea” not to be copied without the
consent of the author
� An expression of idea can be: a writing,
a diagram, musical works
� NO registration is required
� Right derived from author by Employment/
Commission
� Subject to any contrary agreement
� Protection period: 50 years from the death of
author
Due diligence issues
� Who is the legal owner of copyright? Day
Dream? Author? Design House?
� Is there sufficient evidence to support legal
ownership (especially for commissioned
work)?
� Can author be identified / located?
� Document support of copyright e.g. author,
date of creation, commissioned contract,
employment contract
� Copyright protection period expired?
What is Registered Design?
� Article of manufacture
� Shape
� Configuration
� Pattern
� Ornament
���� Appearance of “ ” toy
���� Stationery Design
Hong Kong Copyright Protection for
Registered Design
� 15 Years
� Registered Design – 25 Years
Copyright Design
0 5 10 15 20 25Yrs
Design Registration
� Registration is territorial
� Exclusive right to make or sell article of the
registered design
� No need to prove copyright or ownership
Due diligence issues
� Is Design registered? (otherwise can only rely on
Copyright)
� Has Design expired?
� How many remaining years?
� Who is the registered owner? Day Dream Co. or
some Designer?
� Is Design registered in countries of potential markets
and countries of manufacture? (within 6-month
priority period?)
� Day Dream disclosed “Crazy Bebe” in any trade
show before Design application?
Warranties from Patent
owner/applicant/ inventor
� No infringement of other patents or IP rights
� No disclosure before filing application (novelty)
� Full disclosure in patent application
� Assignment from inventor to applicant if necessary
� Assignment of patent application/ registered patent/
right to claim priority to Big Shark
� Regarding assignment at Patent Office
Warranties from Patent
owner/applicant/inventor
� patent valid (all maintenance fee duly paid)
� inventor to assist in reply to office action during
examination
� assistance in application in other countries e.g. in
obtaining certified priority document
� no active or threatened litigation
� transfer any related know-how if necessary
� any 3rd party involvement in manufacture -e.g. supplier
agreement regarding specific raw materials for making
Crazy Bebe’s skin
IP Evaluation – Cost Approach
� Historical cost basis
� Replacement cost (using current
prices)
� Costs include legal fee, application
fee, development cost, etc.
� Applicable if “ ”
technology/ trade mark is still in
early stage
IP Evaluation – Income Approach
� Present value of future economic benefits
� Future income e.g. revenue from sale
� Duration of income (product life-cycle)
� Risk (new technology, new competitive
product)
� Less precise than cost approach
� Applicable for “ ”technology /
trade mark after entering into market
� Also applicable if Big Shark will license
“ ”technology/ trade mark
IP Evaluation – Relief from royalty
approach
� Present value of royalty stream saved
� Based on “market royalty” fee (how
much others willing to pay for using
technology/ trade mark)
� Applicable if Big Shark is not
planning to license “ ”
technology / trade mark
IP Evaluation – Market Approach
� Compare recent arm’s length
transaction
� No active market
� Data not readily available
(confidential information)
� Each transaction is unique as to
negotiation process, terms and
conditions
Accounting Treatment for Intangible
Asset
� HKAS 38, SSAP 29
� Measured initially at cost
� After initial recognition, costs
less amortization
� Allowed alternative treatment:
� Revaluation based on fair value in
active market
� Rare active market for IP asset
Amortization period
� Best estimate of useful life
� Rebuttable presumption not exceed 20
years (removed by HKAS 38 in 2004)
� Consider:
� Protection period
� Expected usage
� Product life-cycle
� Stability of industry
� Expected competitors
� Interactive technology vs.
“ ”trade mark
IP assets as a whole
� Related IP assets may not be
separable in actual dealing
� For example:
� Magazine’s title (trade mark) and
subscriber’s database (confidential
information)
� Technology (patent) and name of
technology (trade mark) e.g. “ ”
� Special trade mark for the interactive
technology?
IMPORTANT
The law and procedure on this subject are very
specialized and complicated. This article is just
a very general outline for reference and cannot
be relied upon as legal advice in any individual
case. If any advice or assistance is needed,
please contact our solicitors.